1999 Credit Rating for Essex County

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downloaded social service costs within Essex County on the basis of welfare caseloads rather than weighted assessment. Given that Windsor procures approximately 80% of Region- wide welfare cases and the weighted assessment between Essex County and Windsor is approximately 44/56% respectively, a cost risk to Essex County municipalities exists should Windsor be successful in the arbitration favouring weighted assessment allocation. ~, thrther .challenge assocmted with ~ocial ~ervice downloading is the volatile nature of those costs that may increase municipal expenditures during economic downtums as welfare and social housing demands intensify. Despite the funding and service delivery challenges noted above, Essex County does have several budget opportunities that will mitigate somewhat the full cost impact of those items over the medium tenn. A significant funding opportunity in future budget periods is the OMERS pension contribution holiday for Ontario municipalities which has been proposed from August 1, 1998 to December 31, 2001 with a gradual 3- year contribution phase-in thereafter. With Essex County's notable reduction in municipalities, from twenty-one to seven over a two-year period, there is the potential for substantial amalgamation savings. Lastly, a more modest cost opportunity will likely be found in mortgage savings upon renewal (mortgage rollover) of social housing units. CBRS will review the status of the municipality's challenges and exposures, including the funding of temporary revenue sources in future budget periods, and the extent to which the revenue opportunities noted above are realized. The County's financial flexibility and history of prudent fiscal management will serve Essex well during this difficult transition period with the Province. Accordingly, CBRS has maintained it's A rating but will continue to monitor the exposures and challenges articulated earlier as well as the extent to which the Province delegates full control to municipalities with respect to the services for which it has become responsible under the Local Service Re-alignment. ECONOMIC ANALYSIS The County of Essex is an upper-tier municipality governed by a Council that consists of a Warden and 13 Councillors with Council elections last held in November 1998. The Essex County economy is influenced significantly by its proximity to the City of Windsor and the U.S. border as well as its status as Ontario's most concentrated automobile assembly location. There exists a very symbiotic relationship between the City of Windsor and Essex County municipalities as residents of those entities cross local borders for employment purposes. For example, it is estimated that 40% of the non-Windsor Essex County workforce is employed within the City of Windsor. Given that inter-twined relationship noted above, CBRS believes that an economic review should capture the broad regional dynamics of Essex County in aggregate. Looking forward, the area benefits from its competitive tax rates, proximity to the large U.S. and Southern Ontario commercial markets, strong water, air, rail and roadway transportation links, including potential benefits from the NAFTA superhighway and low Canadian dollar which provides competitive advantages to export based manufacturers. Essex County and the City of Windsor share a common economic development perspective with an understanding that attracting new business takes place from a broad regional level to best meet the needs of prospective entrants. That perspective supports our analysis that a strong regional economy is beneficial for all municipalities in the area. The main employment industries in Essex County include automobile assembly operations, auto part manufacturing, tool and die operations, plastic injection moulding, metal stamping activities, large-scale greenhouse operations and traditional farming and agri-business. While Essex County has been successful in diversifying from its core agricultural and automobile dominance, the area would still be adversely impacted by a significant slow-down in demand for those products. In addition, like many Ontario municipalities, the strength of the local economy is heavily reliant on the U.S. market and its demand for Canadian goods and services. Essex County's 1997 personal income per capita value is 4% above the national average and 8% below the provincial average, while consumption, as defined by retail sales per capita is 12% and 9% below national and provincial averages respectively. It should be noted that a lower per capita income figure, by peer comparison, is not necessarily indicative of a lower standard of living since the cost of housing and basis necessities may be a much smaller portion of total income compared to municipalities that have a higher personal income value on an absolute basis. CBRS's analysis indicates that the broad economic area is able to sustain income levels, both personal and business, so that tax paying ability is not impaired. It is that criteria which is most important in any going-concern municipal economic analysis. The municipality's economic development efforts and its ability to attract new businesses and maintain competitive taxes so that it may expand the assessment base to broaden its tax sources and provide additional revenue support for municipal services and programs should be a key forward looking credit consideration. FINANCIAL ANALYSIS County debt and lower-tier debt obligations are unsecured general municipal obligations that rank pari passu and carry no guarantee from any senior level of government. The County's financial strength is evident by its relatively Iow debt levels, strong reserve funds, low debt service ratio and Solid credit ratios by peer comparison. Reserve fund levels have risen every year since 1986 which enhances financial flexibility and is indicative of the municipality's commitment to internal funding of capital projects and current provisioning for future capital expenditures. While CBRS does not necessarily view reserves as a liquid source of funds from which creditor obligations may be paid, they do enhance a municipality's financial flexibility during periods of revenue and financial constraint. Landfill Financing In late 1997, Essex County and the City of Windsor completed a financing transaction that is unique among municipalities and provides low-cost, long-term funding for expansion of the area landfill site. A special purpose trust was established and the County leased the land to the trust with the trust subsequently leasing the land back to the County/City. The initial $27 M debt proceeds flow through the trust from investors to the County/City with investors holding participation units in the trust. Tipping fees from the landfill site are recognized as revenue with the Essex/Windsor Solid Waste Authority and remitted to the trust to cover lease payments. Although the risk is remote, to the extent that tipping fees do not cover lease payments, the County/City is required to inject the differential to the trust from general revenue. Funds in excess of lease and dividend obligations stay in the trust. The trust units may be sold on the secondary market and carry capital appreciation/depreciation potential as they are marked to market based on the level of funds in the trust. Since the trust provides very tax advantageous treatment to investors, the financing provided the County/City with 4.12% funding over a 34 year tenn. Flexibility exists in the trust for the maturity to conffact or extend .as landfill demand varies. Page 3 Canadian Bond Rating Sen4ce